Potemkin Villages on the Potomac

Your tax dollars wasted on pestholes.

Catherine the Great, who ruled Russia from 1762 to 1796, appointed Prince Grigory Potemkin to be one of her ministers. Russia had annexed the Ukraine and the Crimea in 1783. Prince Potemkin gained responsibility for turning this essentially undeveloped frontier into a prosperous, industrial region much as Americans developed the Louisiana Purchase.

Catherine made a grand tour of these regions by royal barge in 1787. Potemkin did his best to impress her by ordering everyone to spruce up, much as any American town would try to clean up if the President were going to visit.

What actually happened is unclear. Mr. Potemkin's critics charged that most of the cities that Catherine had seen were fakes. The Saxon envoy to Catherine's court, Georg von Helbig, passed on the story that most of the villages along the Dnieper river were canvas facades dismantled as soon as the Empress' barge passed and re-erected downriver before she got there.

Ambassador Helbig wasn't along on the trip and he wrote this account ten years after Mr. Potemkin's death in 1791. His tale was so well-told that it fell into the category, "Well, if it ain't true, it oughta be." The phrase "Potemkin Village" entered the language as a label for a colossal fake on a much grander scale than a mere Ponzi scheme.

Potemkin on the Potomac

Prince Potemkin may or may not have conned his Empress; opinions differ. It's certain, however, that American taxpayers have funded a great many Potemkin housing projects all over the United States. The money comes from the federal government, but funding decisions and project management are the responsibility of local housing agencies.

The Washington Postreports that our Housing and Urban Development agency has funded billions of dollars worth of housing for the poor which never materialized:

A nonprofit developer promised to spend millions renovating three rotting apartment complexes in some of the most blighted neighborhoods of Southeast Washington. It would be one of the largest redevelopment projects in years east of the Anacostia River, helping dozens of low-income renters suffering through roof leaks and winters without heat.

In late 2007, then-Mayor Adrian Fenty sent a letter to the D.C. Council touting the developer’s experience, construction team and financing. The council swiftly approved the deal, lending $3.5 million in federal funds to help pay for the renovation of 98 units priced for the poor.

But the project died before a shovel ever hit dirt.

The Post explained that a group of well-connected real estate speculators made over $4 million in profit when they sold the apartments to the government-funded nonprofit based on exaggerated appraisals. Shortly after buying the buildings, the nonprofit went bankrupt without making any repairs.

The Post found that this is typical of projects all over the country. The enabling legislation requires that HUD set aside 15% of its funds for nonprofit "community development" groups whether they have experience in constructing large projects or not.

This story is repeated in federally-funded projects all across the country. On Sunday, May 15, the Post had a page-one story which began:

The federal government's largest housing project for the poor has squandered hundreds of millions of dollars on stalled or abandoned projects and routinely failed to crack down on derelict developers or the local housing agencies that funded them.

A Recurring Problem

Federal housing dollars meant to help the poor instead enriching well-connected contractors is as old as corruption. During the recent Presidential campaign, Candidate Obama tried to make up for his lack of experience by citing his work as a "community organizer" in Chicago. His major claim to fame was forcing the city to remove asbestos from a number of city-owned housing units, at vast government expense.

Despite many federal dollars being spent, this photo essay shows that the housing units aren't in very good shape. The article starts:

If I didn't know better, I'd think this was Beirut in the nineteen seventies. But, in reality, it's the current state of the housing for which Barack Obama claims responsibility as a "community organizer." It turns out the developers enriched by his government-funded subsidies did a heck of a lot better than the folks who once lived here. [emphasis added]

As a state senator, Mr. Obama co-authored a law to create new tax subsidies for builders. As a US Senator, he pressed to increase housing subsidies by $500 million per year. The Boston Globe, in their article "Grim Proving Ground for Obama's Housing Policy" reported that thousands of subsidized apartments had deteriorated to the point that they were uninhabitable. The Globe explained the money flow:

Campaign finance records show that six prominent developers - including Jarrett, Davis, and Rezko - collectively contributed more than $175,000 to Obama's campaigns over the last decade and raised hundreds of thousands more from other donors. Rezko alone raised at least $200,000, by Obama's own accounting.

The Problem with Federal Dollars

This saga of wasted money illustrates once again the poisoning effect of federal dollars being given to pay for projects which state legislators are reluctant to fund. We've seen this problem before.

In 1978, Californians passed Proposition 13 which amended the California constitution to restrict the amount of money which could be raised through local property taxes. Government agencies don't appreciate having their funding cut. The various state employee unions lobbied the state legislature to send state money to the towns to make up the funding that they'd lost by not being able to raise property taxes.

When money came from the state, local politicians were much more willing to spend it - after all, it was state money, and they didn't have to answer to their voters for spending it. Proposition 13, which was supposed to limit government spending, had the perverse effect of increasing spending because the cities were not nearly as careful with state money as with their own money.

The Post's year-long investigation has uncovered a similarly dysfunctional system that spend billions of dollars with few controls. Nationwide, 28,000 projects are open and incomplete.

HUD is an example of another violation of our federal system - spending federal money on projects which are not authorized by the Constitution. They also violate the common-sense principle of subsidiarity, which argues that decisions should be made, and money raised, as close to the problem as possible.

The reason our Constitution gave such a large role to state governments is that the Founders realized that people would have to experiment in order to solve new problems that came up. What's the best way to house the poor?

Set up communal houses for the poor as in England? Fund them through private donations from concerned citizens? Give poor people income supplements as "rent stamps" so they can find apartments on the open market?

We know that having the government directly operate low-income housing has let to crime-ridden "slab slums," some of which have had to be expensively demolished.

What's the right solution, if there is one? We don't know, and we have no way to find out because our federal government has imposed a "one size fits all" solution on all the states. If the feds had simply left the money with the taxpayers, the states could have experimented with different ways of housing the poor, but that's been foreclosed by an expensive, ill-managed federal program.

When asked why their programs are so ill-managed, the feds argue that local people know local conditions better than they do. This is perfectly true, but but it's also true that local authorities are far less careful with federal money than with their own. When the feds shovel ill-managed dollars at states for projects which the states don't think worth funding via their own tax dollars, we're asking for carelessness, incompetence, and fraud.

Nobody will ever know for sure what Catherine the Great saw, but Potemkin villages are alive and well, right here in Washington DC and all across the country.

"The Post explained that a group of well-connected real estate speculators made over $4 million in profit when they sold the apartments to the government-funded nonprofit based on exaggerated appraisals. Shortly after buying the buildings, the nonprofit went bankrupt without making any repairs"

I read about this previously and wondered, instantly, if it wasn't a conspiracy from the beginning by the REIT speculators.

Think about it - it's the perfect crime: victimless (except for the American taxpayers who never heard about it) and in an area and with an agency that is used to corruption and misplaced funding.

Fairly easy to pull off too if you have enough money to stage everything and the connections to be heard by the DC council or someone at HUD.

May 19, 2011 9:36 AM

Nate said:

Isn't all government spending pretty much a scheme to enrich the powerful and take from us? They package it in being nice to the poor, or whomever, but the name of the game is grabbing our money and skimming some of it for them. A small percent of a trillion comes to serious money.

May 19, 2011 5:54 PM

sam said:

France has the same problem

Razing a Neighborhood and a Social Engineering IdeaFrance is hoping that new architecture and new theories about how best to house the poor will solve the problems in a hard-luck Paris suburb.http://www.nytimes.com/2011/09/07/world/europe/07banlieues.html